Quarterly Booking Of Incentives For Claiming Exemption From ESI

Dear Sir / Madam

On July 2016, the firm I am working for has taken PF registration and now all employees are covered under PF. For PF contribution purpose, we have made the salary split up for each employee (before it was just Basic + Sales commission). Here is the salary structure we have now:

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1. Basic

2. DA

3. HRA

4. CCA

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Total 1 - Gross Salary

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5. Other Allowances

6. Sales Commission

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Total 2 - Allowance + Commission

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Monthly Salary of Employee = Total 1 + Total 2

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This salary structure was arrived at with request from management to keep the Gross salary as low as possible, to reduce the burden of ESI and PF. So, what was done - was to keep the basic salary at a minimum with accordance to the minimum wages act applicable to us (in our case - Kerala Shops & Commercial Establishments Act) - and the balance amount which remains after the gross salary is booked as "Other Allowances".

Let me show an example of an employee in our firm - he is a marketing executive whose salary has been decided as ₹30,000/- per month + sales commission. His break up is as follows:

1. Basic - 9330

2. DA - 1300

3. HRA - 3500

4. CCA - 200

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Gross Sal total - ₹14,330

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5. Other Allowance (total sal ₹30,000 - gross sal total ₹14,330) = ₹15,670

6 Sales Commission (varies with sales volume)

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Total salary = 14,330+15,670+sales commission

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In this case, as per my understanding, ESI is applicable on the "other allowance" amount of ₹15,670 and the sales commission amount

But, in ESI wages document, it is mentioned that if some allowances are booked and paid quarterly, then it won't attract ESI. But the problem here is that the employees will not allow quarterly payment of the same as it is forming a significant part of their salary.

So, one of my co-workers has come up with an idea - to mark the "other allowance" portion as advance payment of salary for 2 months, and then book the full amount in the last month of the quarter and pay the balance. -

To make it more clear for the above example, for the sake of calculation, lets assume sales commission to be Rs. 1000

1st month payment = Gross salary 14,330 + Advance amount ₹16,670 (₹15,670 other allowance+ sales commission ₹1000) = Total ₹31,000

2nd month payment = Gross salary 14,330 + Advance amount ₹16,670 (₹15,670 other allowance + sales commission ₹1000) = Total ₹31,000

3rd month payment

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1. Add: Gross salary ₹14,330

2. Add: quarterly payment of incentive + allowance - ₹50,010

{ [3 months x 15,670 = ₹47,010] + commission for 3 months [1000 x 3 = ₹3,000] }

3. Less: advance deduction for previous 2 months = (16,670 x 2) = ₹33,340

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Net payment: ₹ 31,000

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So, in effect, employee does not notice any change, as payment amount for each month is same as before, but the booking is done quarterly and we can argue payment is done quarterly also, as for the first two months, employee is taking the amount as advance

Please give your valuable comments and suggestions for this method, and if we adopt this can the other allowance and commission amounts be exempted from ESI?

Also, any other suggestions by you for helping us claim exemption from ESI is greatly appreciated.

Thanks and Regards
27th April 2017 From India, Chennai

Dear John,

This is not news or new, many employers (employees) adopt this method to reduce ESI contribution. I equate this Sales commission to Incentive vice versa and the discussion on this could be seen here in this link:

https://www.citehr.com/273844-pf-esi...incentive.html

As per the Act, wages means -

all remuneration paid of payable in cash to employee according to terms of contract of employment and

includes any payment made to an employee in respect of period of authorized leave, lock-out, lay-off, strike which is not illegal and other additional remuneration paid at interval not exceeding two months.

It does not include contribution paid by employer to any pension fund or provident fund, traveling allowance, reimbursement of expenses made by nature of employment of the employee.

Thus, wages include basic pay, dearness allowance, city compensatory allowance, payment of day of rest, overtime wages, house rent allowance, incentive allowance, attendance bonus, meal allowance and incentive bonus. However, wages do no include annual bonus, unilateral rewards scheme (inam), ex gratia payments made every quarter or every year traveling allowance, retrenchment compensation, encashment of leave and gratuity.

Also pl.see more from the attached notes on 'wages'

Therefore your sales commission when not paid as allowances on monthly basis can escape.

But when it comes to EPF you have to rethink as the more they contribute more savings for their future which includes employers' equivalent contribution also with added interest thereon. But you cannot have the cake and eat it too.
27th April 2017 From India, Bangalore

Attached Files (Download Requires Membership)

WAGES & SALARY- ESI- DEFINTIONS & CASE LAWAS.docx (16.4 KB, 101 views)

your Salary Structure should test the Law from the point of EPF & ESI.This restructuring is subsequent to coverage under EPF & ESI.Little knowledge is dangerous? Please do not think about restructuring, which is devoid of rationale
27th April 2017 From India, New Delhi

ESI is applicable to Employees whose Gross salary is Rs21,000/-PM.Employees whose Gross salary is above Rs21,000/- are excluded from the purview of ESI Act
28th April 2017 From India, New Delhi